(26-02-2014 06:30 AM)Mathilda Wrote: Spain is not a closed system and it can make use of that extra gold by paying for stuff from abroad. This is where the analogy loses relevance to modern day finance. There is only so much gold available in the world whereas a fiat currency can be specific to a single country, created on demand and cheapened relative to other currencies.

Maybe the thought experiment would be better if it involved a small community ship-wrecked on a desert island with someone who finds out how to manufacture a finite resource that is a useful alternative to another less convenient manufactured resource?

As a group, we're overthinking the details of this. In hypotheticals, it's typical not to inject anything that wasn't stated. We assume the kingdom is isolated, because there is no mention of trade with other kingdoms. We assume gold is the only form of money, because other forms were not mentioned, etc. All those details matter in the real world of course, but the idea of a hypothetical is to establish a principle.

Then arguments can be made as to why that principle doesn't apply in the real world, and if those arguments are good, then the hypothetical will be seen to have been too simplistic. But you have to play the game first.

If you're laying out a hypothetical you first need to demonstrate why anybody should care.

It wasn't a trick question, the answer was obvious. Before the change, the King and the common folks each had half the gold. Afterwards, the King had 2/3 and everybody else 1/3, so the King's % of the wealth got bigger, and everybody else's smaller. Inequality increased.

Toadaly, since he's not defending the current monetary system, had no trouble pointing this out. The rest of the comments are distractions to avoid this self-evident conclusion.

Sure, as Chas said, I didn't mention silver, which may be money also. But that doesn't change the fact that the King's % of the wealth got bigger and everyone's got smaller. Sure, if the King doesn't spend the new gold it has no economic impact and it won't affect the people. But that doesn't change the fact that the King still has more wealth. Sure, if the King buys imports from other countries it may increase the total wealth in Spain. But that doesn't change the fact that the King's % of the wealth got bigger.

And it doesn't matter whether you're talking about gold or any other money. As the owner of the UK's central bank once allegedly said: "Let me issue and control a Nation's money and I care not who makes its laws" and "I care not what puppet is placed upon the throne... The man who controls Britain's money supply controls the British Empire, and I control the British money supply."

The part that I don't understand is why so many people seem pre-programmed to accept this. It's like you discover an isolated island with 1,000 people on it, all have agreed to use "X" as money. And only one guy on the island, "Ben", is allowed to produce "X", and everybody else gets whatever "X" Ben spends. Naturally Ben has more wealth than the other 999 people combined. So you tell the 999, "Hey this is an unfair system that really just benefits Ben." But the people just repeat the doctrine that Ben has been pounding in their heads for years: "No, this is for our own good. Ben graciously setup this system to help us all."

It wasn't always like this. In 1910 when the big banks designed the Federal Reserve, they traveled to the big planning session on Jekyll Island in the middle of the night, in a private railroad car, using false identities and code names because they knew if reports of their plan were leaked it would cause public outcry, since the people back then understood the obvious fact that whatever group has the power to print money has the power to transfer unlimited wealth from the people to themselves.

Sure, there was a valid public concern about bank liquidity. The major economic recessions were generally caused by banks practicing fractional reserve banking, meaning they can take $100 on deposit, and loan out $1,000. The banks were greedy, took on huge risks, and as soon as even a small % of people tried to withdraw their money, the banks ran out. This led to bank runs and panics, and in turn economic crisis. But, the obvious solution is that the government provides backing (FDIC insurance) only for banks that don't take on such risk, and practice full reserve banking. Then the people have a safe place to park their money and you won't have all the economic problems. But, for the banks, a better solution was to continue to let them take on all the risk they want, and whenever they make mistakes and get under water, just let them print all the money they want. In the end, now, the big banks that own the central banks own almost half the world's multi-national industry. But, today, 100 years later, somehow they've managed to convince almost all the people that this system benefits the people--not the banks.

Despite it being so obvious. In 2008 when the banks were underwater many of them were teetering on bankruptcy. Then the Fed steps in with QE and gives the banks trillions of dollars. Then, a couple years later, without making any structural changes, without re-orgs, without cost-cutting, the big banks turned record profits--the biggest in history. This was not NEW wealth--the country still had the same amount of hard assets as before. It was just a massive transfer of wealth to the banks.

I get why bankers love this system. But what baffles me is why people who are not bankers and were on the losing end of the deal still keep defending it as being for their own good.

(26-02-2014 11:44 AM)frankksj Wrote: It wasn't a trick question, the answer was obvious. Before the change, the King and the common folks each had half the gold. Afterwards, the King had 2/3 and everybody else 1/3, so the King's % of the wealth got bigger, and everybody else's smaller. Inequality increased.

It was trivial and pointless. Asking you to get to whatever point you think you're making is not "being unable to answer".

(26-02-2014 11:44 AM)frankksj Wrote: Sure, as Chas said, I didn't mention silver, which may be money also. But that doesn't change the fact that the King's % of the wealth got bigger and everyone's got smaller. Sure, if the King doesn't spend the new gold it has no economic impact and it won't affect the people. But that doesn't change the fact that the King still has more wealth. Sure, if the King buys imports from other countries it may increase the total wealth in Spain. But that doesn't change the fact that the King's % of the wealth got bigger.

Everyone who produces or accumulates something becomes wealthier. Get to the point.

(26-02-2014 11:44 AM)frankksj Wrote: And it doesn't matter whether you're talking about gold or any other money. As the owner of the UK's central bank once allegedly said: "Let me issue and control a Nation's money and I care not who makes its laws" and "I care not what puppet is placed upon the throne... The man who controls Britain's money supply controls the British Empire, and I control the British money supply."

"Allegedly". Get to the point.

(26-02-2014 11:44 AM)frankksj Wrote: The part that I don't understand is why so many people seem pre-programmed to accept this.

Well, you've never held back from inventing other people's positions for them before.

(26-02-2014 11:44 AM)frankksj Wrote: It's like you discover an isolated island with 1,000 people on it, all have agreed to use "X" as money. And only one guy on the island, "Ben", is allowed to produce "X", and everybody else gets whatever "X" Ben spends. Naturally Ben has more wealth than the other 999 people combined. So you tell the 999, "Hey this is an unfair system that really just benefits Ben." But the people just repeat the doctrine that Ben has been pounding in their heads for years: "No, this is for our own good. Ben graciously setup this system to help us all."

Get to the point.

(26-02-2014 11:44 AM)frankksj Wrote: It wasn't always like this.

No, we had the king of Spain and his conquistadors.

(26-02-2014 11:44 AM)frankksj Wrote: In 1910 when the big banks designed the Federal Reserve, they traveled to the big planning session on Jekyll Island in the middle of the night, in a private railroad car, using false identities and code names because they knew if reports of their plan were leaked it would cause public outcry, since the people back then understood the obvious fact that whatever group has the power to print money has the power to transfer unlimited wealth from the people to themselves.

You keep using that word 'transfer'. I do not think it means what you think it means.

(26-02-2014 11:44 AM)frankksj Wrote: Sure, there was a valid public concern about bank liquidity. The major economic recessions were generally caused by banks practicing fractional reserve banking, meaning they can take $100 on deposit, and loan out $1,000.

That's the difference between a bank and a warehouse. It's a pretty old idea.

(26-02-2014 11:44 AM)frankksj Wrote: The banks were greedy, took on huge risks, and as soon as even a small % of people tried to withdraw their money, the banks ran out. This led to bank runs and panics, and in turn economic crisis.

As has happened ever since money was invented, yes. You do know that banks failed all the time in the past, right?

(26-02-2014 11:44 AM)frankksj Wrote: But, the obvious solution is that the government provides backing (FDIC insurance) only for banks that don't take on such risk, and practice full reserve banking. Then the people have a safe place to park their money and you won't have all the economic problems. But, for the banks, a better solution was to continue to let them take on all the risk they want, and whenever they make mistakes and get under water, just let them print all the money they want. In the end, now, the big banks that own the central banks own almost half the world's multi-national industry. But, today, 100 years later, somehow they've managed to convince almost all the people that this system benefits the people--not the banks.

(26-02-2014 11:44 AM)frankksj Wrote: Despite it being so obvious. In 2008 when the banks were underwater many of them were teetering on bankruptcy. Then the Fed steps in with QE and gives the banks trillions of dollars. Then, a couple years later, without making any structural changes, without re-orgs, without cost-cutting, the big banks turned record profits--the biggest in history. This was not NEW wealth--the country still had the same amount of hard assets as before. It was just a massive transfer of wealth to the banks.

Wealth is not physical. It's consensual.
(and there's that abuse of the word 'transfer' again)

(26-02-2014 11:44 AM)frankksj Wrote: I get why bankers love this system. But what baffles me is why people who are not bankers and were on the losing end of the deal still keep defending it as being for their own good.

Of course I agree. The main reason why gold worked pretty well as money is because it's strewn around the world in tiny flecks so, even with a lot of mining effort, the total quantity grew 1-2% annually, a rough approximation for an expanding economy under normal circumstances.

It certainly was not perfect. For decades Milton Friedman proposed a better system where some 'machine' is able to increase the money supply organically, without human intervention, at precisely the same rate as the economy. Essentially, he was describing bitcoin and e-currency, he was just decades ahead of the technology being available.

I am NOT arguing that a gold standard is a great system, and certainly not saying it's the best system. I think all legal tender laws should be revoked, and let people naturally, of their own free will, use the medium of exchange which works best. Let gold, bitcoin, dollars, euros, etc. all compete in a free market and let individuals pick what they want to use. What I oppose is hauling people off to jail who use unapproved money, like liberty dollars, and now bitcoin, etc.

So I am not defending one particular monetary system. Rather I AM point out that the current system where a group of uber-wealthy elite who already hold half the world's wealth are given the exclusive power to make money, and they use the government to arrest anybody who challenges their power, is a bad system. That's all. Just remove the use of force, let people exercise free will, and I'd be happy with whatever monetary system the people chose.

I'm not convinced that a stable economy is impossible without an ever expanding money supply. If the money supply were fixed, it would certainly change how people behave - knowing that your money would buy more in the future, would encourage saving rather than consuming. But why would equilibrium not be possible?

(26-02-2014 03:07 PM)toadaly Wrote: I'm not convinced that a stable economy is impossible without an ever expanding money supply. If the money supply were fixed, it would certainly change how people behave - knowing that your money would buy more in the future, would encourage saving rather than consuming. But why would equilibrium not be possible?

Remember what happened the last time the US had deflation.... People stopped buying, knowing money would go up in value. And since one man's spending is another's income, the economy came to a halt and it turned into the great depression. Even the Fed chairman admitted it was caused by a mistake at the Fed shrinking the money supply.

Inflation/deflation are simply 2 sides to the same coin. Either way one group wins, and another loses. With inflation, wealth is transferred from savers to spenders and borrowers. And vice-versa with deflation. So, either way, when prices are unstable, you have a populace living in fear, not wanting to end up on the losing side.

Having lived in a country with no inflation for decades, I see that it radically affects people's behavior. When I lived in the US, like every American, the first thing in any sound financial plan was to buy a house. Then I moved to Switzerland where everybody rent instead of investing in a depreciating asset. They're right, of course. When in the US, without even knowing it, I lived in fear of inflation. I was afraid that if I didn't buy a house NOW, in the future I might not be able to afford it, so I needed to lock in a place to live. But it never occurred to me that attitude was actually living in fear of inflation, until I lived somewhere without inflation.

I agree with Friedman the best money is one that grows at precisely the same rate as the economy so prices remain stable and everybody can plan for the future without monetary policy picking winners and losers.

However, even if the money supply grew at the same rate as the economy, the current system where all the new money is deposited into the reserve accounts of the uber-rich is still a terrible solution. It's also prone to gaming. Heck, if all new money from the Fed was deposited into MY account, then I too would be insisting we need a healthy dose of inflation, and doing everything possible to trick people into thinking it was a fair system and that prices were actually stable. The best way, imo, to increase the money supply is when new money is produced, it gets deposited into everybody's account, so that increasing money doesn't transfer wealth from one group to another, and everything remains in equilibrium.

Of course I agree. The main reason why gold worked pretty well as money is because it's strewn around the world in tiny flecks so, even with a lot of mining effort, the total quantity grew 1-2% annually, a rough approximation for an expanding economy under normal circumstances.

It certainly was not perfect. For decades Milton Friedman proposed a better system where some 'machine' is able to increase the money supply organically, without human intervention, at precisely the same rate as the economy. Essentially, he was describing bitcoin and e-currency, he was just decades ahead of the technology being available.

I am NOT arguing that a gold standard is a great system, and certainly not saying it's the best system. I think all legal tender laws should be revoked, and let people naturally, of their own free will, use the medium of exchange which works best. Let gold, bitcoin, dollars, euros, etc. all compete in a free market and let individuals pick what they want to use. What I oppose is hauling people off to jail who use unapproved money, like liberty dollars, and now bitcoin, etc.

So I am not defending one particular monetary system. Rather I AM point out that the current system where a group of uber-wealthy elite who already hold half the world's wealth are given the exclusive power to make money, and they use the government to arrest anybody who challenges their power, is a bad system. That's all. Just remove the use of force, let people exercise free will, and I'd be happy with whatever monetary system the people chose.

Walmart pays in Walmart Dollars
McDonalds pays in McBucks
Bank branches pay in their own currency
..and so on.

Currency that you can only use at their own institutions. This is the EXACT OPPOSITE of freedom. This is slavery. You're forced a currency that you're forced to use in certain stores and banks, with all the strings attached.

Your work forces a currency that you can use at their stores, with their prices? "So what! People can go find a new job! With the currency that they like!" How are they to find news jobs, to move across regions, to know "what currency" a corporation will pay tomorrow, or what is a "good" currency?

Even if the idea that magically it'll settle out in the end, the amount of chaos and poverty it'll wrought along the way would be insane.

I'm fine with greater oversight on the institutions that print our money (because it's also insane to allow bankers run an institution that prints money to bailout the same bankers in the end), rather than going balls up and saying print whatever you like and see what happens.

(26-02-2014 06:38 PM)frankksj Wrote: Remember what happened the last time the US had deflation.... People stopped buying, knowing money would go up in value. And since one man's spending is another's income, the economy came to a halt and it turned into the great depression. Even the Fed chairman admitted it was caused by a mistake at the Fed shrinking the money supply.

The great depression was much more complex than simply money supplies. It was a wild ride of unpredictable deflation caused by a currency war made possible by the fact the money supply had been inflated far beyond what reserves could support. But if deflation were slow and predictable, like it is in electronics for example, people adjust to that reality and make it work. Why wouldn't a static money supply cause predictable and manageable deflation?

Quote:Inflation/deflation are simply 2 sides to the same coin. Either way one group wins, and another loses. With inflation, wealth is transferred from savers to spenders and borrowers. And vice-versa with deflation. So, either way, when prices are unstable, you have a populace living in fear, not wanting to end up on the losing side.

I understand how an inflating money supply benefits the banking and ruling elite at the expense of everyone else, but it's harder to see how an organically deflating money supply (deflating at roughly the rate of population growth), which aught to be predictable, would have the same kind of effect.

Quote:I agree with Friedman the best money is one that grows at precisely the same rate as the economy so prices remain stable and everybody can plan for the future without monetary policy picking winners and losers.

I don't agree with that approach. Technology is constantly improving yields. If prices deflate as a result of this, rather than remaining constant, then the common man benefits. His relatively constant income is perpetually buying more and improved goods and services, rather than a constant amount. Is there a good reason that all of us should not benefit from the ever constant exponential increase in yields? Sure, the innovators should benefit more, but why should bankers get the rest?

With managed inflation, the common man only keeps up at best, and the ruling elite get almost all the benefits of innovation via the creation of money from nothing. It's not quite that extreme, as some of the welath created by technology does in fact trickle down, but not that much in relative terms.

At any rate, this is somewhat theoretical, as it's hard to imagine a realistic scenario where the money supply would be fixed.

Currency that you can only use at their own institutions. This is the EXACT OPPOSITE of freedom. This is slavery. You're forced a currency that you're forced to use in certain stores and banks, with all the strings attached.

Hopefully you realize, these discussions are not just theoretical. There have been times when it really was a free for all - actually most nations, for most of human history. Generally, sovereigns paid wages in their own stamped money, and demanded the same or better for payment of taxes and debts, but beyond that, people could trade however they wanted amongst themselves.

Technically, you can still do that today as well, but in reality, the police state has prosecuted people for counterfeiting who have done so...so in practice, it's illegal.

@frankksj I totally get where you are coming from and don't get me wrong, I'm actually quite distrustful of Keynesian economics, or maybe just the politicians who use the excuse that they are Kensyian economists to inflate away their problems in the short term. The Austrian school of economics gels better with my understanding of complex systems because it involves more of a bottom-up approach. Not that I am an economist though so I am in no way talking from a position of knowledge on the matter.

For me though the bigger issue is that the whole economic system is fundamentally unsustainable and will come crashing down regardless of which school of thought we use to try and control it. Due to the nature of exponential functions, it will be very difficult to truly appreciate how soon the crash is.

I recognise all those quotes about the money supply from the video on youtube, 'Money as debt'. If you want to read something just as disturbing, if not more so then check out this website or buy this book.